Why Olam's acquisition of a Nigerian asset is not a cash cow

Kayass is a good fit for Olam but it yields marginal profits, says CIMB.

Olam has acquired 100% of Kayass Enterprises for US$66.5m, which according to CIMB translates into 1.6x NAV by estimates.  While this is not cheap, CIMB analyst Lee Wen Ching says that it fits in well with Olam’s existing platform. Profit-wise though, the analyst said that the investment will only yield less yhan 2% earnings accretion in steady state. 

Here's more from CIMB:

Kayass, which has been Olam’s customer for six years, manufactures and markets dairy products and beverages in Nigeria. It has 10% share of Nigeria’s bulk milk powder market. Its factories are relatively new at just three years old  but its owners decided to divest the assets due to lack of working capital.

No additional capex is needed and Olam will finance the purchase via internal funds and borrowings. It wil ramp up utilisation of the factories, which are currently underutilised.

We are keeping our EPS forecasts as  this investment will not contribute significantly to the group’s profits. We estimate less than 2% earnings  accretion in steady state. The investment is expected to be profitable from FY14 onwards as Olam will ramp up capacity utilisation. It is expected to deliver 20% EBITDA margin in FY16.